Granite Construction Incorporated (NYSE: GVA) — Q1 2022 Form 10-Q
Business context and reporting period
For the three months ended March 31, 2022. Granite provides infrastructure construction and materials, primarily in the United States. Results are presented for continuing operations unless noted. The company reorganized its reportable segments as Construction and Materials and classified its former Water and Mineral Services businesses as discontinued operations. Granite cautions that first-quarter results are seasonally affected by weather and are not necessarily indicative of full-year results.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Revenue | $547.6 million | $566.3 million |
| Gross profit | $49.8 million | $53.7 million |
| Gross margin | 9.1% | 9.5% |
| Operating loss | $16.6 million | $79.5 million |
| Net loss from continuing operations | $15.9 million | $62.4 million |
| Net loss attributable to Granite | $12.9 million; $0.29 per share | $66.2 million; $1.45 per share |
| Operating cash flow | $(50.2) million | $38.1 million |
- Construction revenue fell 6.3% to $474.9 million; Materials revenue rose 22.4% to $72.7 million. Construction gross margin was 10.1% versus 10.4%; Materials gross margin was 2.2% versus 1.6%.
- Cash and cash equivalents were $360.9 million at March 31, 2022, including $100.1 million held by consolidated construction joint ventures; marketable securities were $36.7 million. The filing notes joint-venture assets generally are not available for Granite’s working capital until distributed.
- Total debt was $299.3 million, including $230.0 million of 2.75% convertible notes due 2024. Granite repaid $60.9 million of its term loan during the quarter. Revolver availability was $242.1 million, with no revolving borrowings and $32.9 million of letters of credit outstanding.
- Current assets were $1.593 billion and current liabilities were $939.3 million. Management said expected liquidity sources should cover anticipated needs for the next 12 months.
- Committed and Awarded Projects (CAP) totaled $3.935 billion, down from $4.172 billion a year earlier and $4.010 billion at year-end 2021. About $2.0 billion of March 31 unearned revenue was expected to be recognized within 12 months. Four contracts had forecast total losses and $176.4 million of remaining revenue.
Material changes versus the prior period
- Revenue declined 3.3%, mainly because of lower Construction revenue in the Central group and less favorable California weather, partly offset by growth in the Mountain group and Materials.
- Gross profit declined $3.9 million, with lower Construction revenue and early progression on lower-margin work partly offset by improved Materials performance.
- Operating loss narrowed substantially from Q1 2021, principally because prior-year other costs included approximately $66 million of securities-litigation settlement charges. Q1 2022 other costs were $8.2 million, primarily non-recurring legal fees.
- Operating cash flow moved to a $50.2 million use of cash from $38.1 million provided, primarily reflecting working-capital movements, including increases in receivables and contract assets.
- Inliner was sold on March 16, 2022 for a stated purchase price of $159.7 million; cash proceeds based on preliminary post-closing adjustments were $142.6 million. The sale generated a $6.2 million gain included in discontinued operations. Water Resources and Mineral Services remained held for sale.
- Adoption of ASU 2020-06 on January 1, 2022 increased reported debt by approximately $22.0 million and reduced additional paid-in capital and retained earnings by a net $16.4 million.
Outlook, management commentary, risks and unusual items
- Granite cited the Infrastructure Investment and Jobs Act and state and local funding as potential demand supports. Management expected meaningful effects on project lettings to begin in late 2022 and grow in 2023 and beyond; best-value and alternative-delivery procurement may delay bookings and starts in the near term.
- Management identified inflation, supply-chain and labor constraints, and higher diesel and liquid-asphalt prices as pressures. The Ukraine conflict had further increased oil prices; mitigation includes contract pricing, bulk purchases and forward contracts. COVID-19 remained a source of uncertainty.
- Granite estimated 2022 capital expenditures for continuing operations of approximately $100 million to $115 million.
- The company recorded $129 million of liabilities for securities litigation; $63 million was funded by insurance proceeds and the settlement amount was placed in escrow. The court granted final approval on March 17, 2022; a plaintiff filed an appeal on April 15. A related derivative-lawsuit settlement proposed a $7.5 million insurer payment to Granite and governance provisions, subject to court approval.
- Salesforce Tower-related claims seek approximately $70 million from Layne and approximately $30 million from Granite in arbitration. Granite said a material loss was not probable, but estimated reasonably possible loss could be up to approximately $100 million if unsuccessful; it intends to defend the claims.
- The SEC has issued subpoenas concerning the company’s prior-period accounting investigation; Granite said it continues to cooperate. The filing reported no material change in previously disclosed risk factors or market-risk exposure.
- Granite repurchased 611,000 shares under a new $300 million authorization during the quarter; $281.5 million remained available at March 31, 2022. The quarterly dividend was $0.13 per share.
Important facts for investors to verify
- Whether CAP converts into funded, executable work and how the $176.4 million of remaining revenue on loss-forecast contracts develops.
- Whether inflation, labor and supply constraints affect project costs, pricing, margins and cash conversion.
- Progress and final proceeds from the remaining Water Resources and Mineral Services divestitures.
- Developments in the securities-litigation appeal, proposed derivative settlement and Salesforce Tower claims, including any change to recorded or reasonably possible losses.
- Availability of cash held in joint ventures, compliance with credit-agreement covenants, and refinancing or conversion considerations for the 2024 notes.